Many bitcoin users are attracted to its perceived anonymity; however this feature is misleading. Users transact through pseudonymous addresses — long strings of letters and numbers — which can be deanonymized. The two main methods to accomplish this are known as Analysis of Transaction Chain (ATC) and Analysis of Bitcoin Protocol and Network (ABPN).
ATC works by using Bitcoin’s transparency against it, pulling transaction information from public blockchain data. It then goes on to “classify Bitcoin addresses based on the weakness of Bitcoin anonymity and to relate Bitcoin addresses to other personal identities”. ABPN, on the other hand, works by making use of the “spreading characteristics of Bitcoin transactions to deduce the source IP address of a new transaction”.
The IP address is one of the most personally identifiable sources of information when it comes to Bitcoin transactions, as it can pinpoint a user to the specific location and computer/device from which it was sent.
While there are some countermeasures for ATC, such as implementing Coinjoin and Stealth addresses, the same cannot be said for ABPN. According to the whitepaper, “there has been little research into ways to counter ABPN.” If ATC and ABPN became mainstream, it could make Bitcoin substantially less confidential, and would make services like Bitcoin mixers as well as the above implementations a necessity.
Luckily, a new whitepaper from researchers QuingChun ShenTu and JianPing Yu called “Transaction Remote Release (TRR): A new Anonymization Technology for Bitcoin” might be the solution that Bitcoin users seeking privacy are looking for.
Borrowing the same principle from TOR (The Onion Router) network, it thwarts ABPN by encrypting the transaction, layer by layer. While typical bitcoin transactions broadcast the details to as many nodes as possible, TRR would work by connecting the client to one node and encrypting it. It would then connect to another node, decrypt the data with its unique private key, and transmit to the next node. This step repeats until it reaches the last node, where then, and only then, will it broadcast the data to the public Bitcoin blockchain.
TRR in its current state has two major weaknesses that the research paper acknowledges: the need to heavily modify the Bitcoin protocol and its vulnerability to DOS attacks coming from fake TRR requests. Further research would be needed to alleviate TRR of these disadvantages, but if eventually implemented, TRR could go a long ways to keeping Bitcoin transactions safe from prying eyes.